A recent court case involving sports direct owner Mike Ashley was widely publicised. Mr Blues and Mr Ashley were in the pub together with a colleague. Mr Blues alleged that Mr Ashley agreed to pay £15m if the Sports direct share price rose to £8. They fell out and went to court. The claim ultimately failed, but the case did underline the fact that, in certain circumstances, very valuable contracts can be agreed verbally if you can prove that the core terms of the deal were struck and the people involved intended to make a deal.

We are often concerned with land deals for our clients, whether it is buying or selling land, or agreeing option contracts for a housing or a renewable energy development. The general rule in Scotland, as you might be aware, is that a contract involving land in Scotland is not legally binding until it has been set out in writing and signed by both parties.

However, it is worth bearing in mind that there is an exception to this general rule (as ever) that can easily catch people out.

one party to the arrangement acted (or refrained from acting) in reliance on a contract being in place and this was known about or acquiesced in by the other party; and

as a result of the acting or refraining, the position of the first party has been affected to a material extent and would be adversely affected to a material extent by any withdrawal from the (informal) contract by the other party

then the other party cannot withdraw from the contract or argue that it is invalid on the grounds of it not having been properly constituted. This is often referred to as “statutory personal bar.”

So what does this actually mean?

Basically, where a verbal agreement on the key elements on the deal has been reached and one person has incurred expense in reliance on the deal with the knowledge of the other, then the contract can become binding and enforceable. This is the case even if no written agreement has been signed.

Consider an example. Tom farms Blackacre farm. Jim asks Tom if he could buy a one acre plot for a house if he can get planning permission. Jim says he will pay for all the planning costs, surveys etc. and will pay Tom £50,000 for the plot when he gets planning. Tom agrees and the lawyers are to sort the detailed contract out and check the title deeds. While the lawyers iron out the detailed wording in the contract, Jim says he will pay Tom a deposit of £5,000 to show his good faith and starts to pay for bat surveys and archaeological audits of the land. Tom accepts the deposit and allows access for the surveys.

While Jim’s planning application is going through the system, a renewable energy developer approaches Tom and says that his one acre field is ideally located for a battery storage plant and would he sell it to them for £500,000? Tom’s lawyer confirms that the contract with Jim’s lawyer have not been concluded yet. Tom advises Jim that he has had a much better proposal. He offers to repay Jim’s deposit. Jim says that Tom cannot change his mind because their agreement is legally binding, even although the legal contract has not been concluded in writing. The trouble is, Jim may well be right and it may not be possible for Tom to back out at that stage.

You can see that a property owner who has been discussing a sale with someone, but has not yet tied up a formal contract, can in some circumstances be treated as if he had made a fully legally binding contract.

So how can you avoid stumbling into a binding contract without realising it?

We always advise clients to make clear that any verbal discussions or informal negotiations are not intended to be legally binding commitments. The best way to do this is to put disclaimers into any correspondence that you have with the other person. This would be wording that states that the correspondence or draft contract is not intended to be legally binding, but is only for the purpose of negotiation and discussion at this stage.

Ideally, do not let people start work or incur costs before any formal contract is put in place.

Please take care with any land negotiations an always seek advice from your solicitor at an early stage in the progress.

An Agriculture Bill was included in the recent Queen’s speech as a core part of the Government’s mammoth task of legislating for Brexit.

The plan is that the bill will create a new system of support for farmers to replace the Basic Payments claimed under Common Agricultural Policy. Of course it is early days and we won’t know the details of how the new scheme is intended to operate for some time.

While the suggestion that some form of support will be put in place, at least in the short term, is welcome, many commentators are of the view that the value of direct subsidy support will be reducing in the future. Taken with the current Westminster tend for pulling away support for renewable energy technology, farmers and landowners will be looking at other opportunities for diversification of their enterprises.

One such option remains new planting of woodlands. Planting levels are still low in historical terms and the Scottish Government has pledged to increase Scotland’s woodland cover significantly over the next few decades. It intends to increase its annual planting target from 10,000 hectares to 15,000 hectares by 2025.

There are number of advantages for forestry that make it an investment worth looking at. There are still good grants available for establishing and managing forestry under the Scottish Rural Development Programme. It seems likely that type of support will continue. The political will to encourage environmental benefits in land management is clear.

There are also currently significant tax advantages available, particularly for those looking to invest in the mid to long term, and where the forestry is managed on a commercial basis. For example, income derived from the sale of timber from a commercial woodland is not subject to income tax in the UK. Capital gains tax is payable on the sale of the land that the trees are growing on, but not on the value of the timber itself (whether standing or felled). Forestry land is also potentially eligible for helpful “holdover” and “rollover” reliefs for capital gains tax. From an inheritance tax point of view, commercial forestry may also qualify for Business Property Relief, subject to certain criteria.

A fairly recent development is the ability to top up income from woodland creation by selling carbon units under the Woodland Carbon Code. This scheme is designed to allow business to mitigate the impact of their greenhouse gas emissions by helping to fund tree planting. To qualify, the landowner must commit to certain conditions, such as retaining the woodland for an agreed minimum period and adopting an agreed silvicultural system.

Investing in forestry is a long game and it will not be for everyone, but it is certainly worth a look.

From a legal point of view, access is crucial for forestry. If you don’t own the road that you would use for timber extraction, it is vital that you check the extent of the access rights in your title deeds before committing major expenditure. Forestry extraction is one of the most intensive uses in terms of access and if there is any limit or restriction on your rights of access, it could pose a serious issue.

As ever with the law, things are not straightforward. Even if your title has a general grant of access without any express qualification or restriction, it is still possible to get caught out. There are legal rules in Scotland that imply certain conditions on a servitude right of access. One of those is that the use of the access road will not be increased beyond the extent that is necessary to use it for its original purpose. This is not always clear cut and you might need to look at other evidence to identify what the original granter of the access right had in mind at the time.

So if you are seizing up a woodland project, do have your solicitor check out your access rights before you to far down the line.

Farming Partnerships: If your farm is run by two or more partners it is vital to have a properly drawn up partnership agreement, even if your partners are also your family. A partnership agreement is a legal document that sets out the rules of the partnership, so that if something changes there is no dispute as to what needs to happen.

What happens if there is no partnership agreement?

If there is no partnership agreement the law as defined in the Partnership Act 1890 effectively writes the rules for you, and these may not be what you want. For example, without a partnership agreement the law states that all partners have an equal vote and are entitled to an equal share of the profits.

What events might require recourse to the partnership agreement?

Broadly, any fundamental change in the partners’ circumstances may trigger a dispute in the partnership. For example a death in the family, a divorce or a falling out could all become problematic if rules are not properly defined and agreed in advance.

What should the partnership agreement cover?

Partnership agreements will contain various clauses depending on the structure of the partnership. We recommend that you review your agreement with your solicitor every 3-5 years to ensure that any changes to the law or your circumstances are properly handled. At a minimum, your partnership agreement should give consideration to the following points.

Business Continuity

A properly framed agreement will allow the business to continue if an existing partner dies or retires, or if a new partner joins the business. If circumstances such as these are not handled properly in the partnership agreement, the existing partnership may have to end and a new partnership be created. This may have unintended tax and legal consequences, for example you could be deemed to have ceased one trading business and started another.

Partners’ entitlement

It is important to define what an outgoing partner is entitled to; what happens to their stake in the business may come into dispute if the rules are not clearly stated in the agreement. For example if a partner either leaves the partnership or dies, what are they or the beneficiaries of their estate entitled to? The rules can be complicated and one of the key decisions to be made is whether the partnership assets are to be revalued at their current market value or whether they are to be taken at “book value”.

It is also important to consider whether the farmland is a partnership asset. If it is, you may want to include in the agreement a clause that gives the remaining partners a period of time, typically three to five years, to buy out the partner who is leaving. It is also worth considering carrying life insurance that would pay out should a partner die.

Consideration of Inheritance Tax

If certain criteria are met, the surviving partners in a trading business will usually qualify for valuable inheritance tax reliefs on the value of their share in the partnership. Additionally, if the land is not a partnership asset, a carefully thought out and defined agreement can preserve potential agricultural property relief for inheritance tax. Specific provisions governing how owners allow the firm to use the land are crucial. These provisions can also help with cross compliance inspections if there is ever any question about whether the partnership has the land “at its disposal” for subsidy purposes.

Voting Rights

The default rule is that each partner has one vote; the vast majority of decisions are made by simple majority voting. If you believe that there are business decisions that should require qualified majority voting, or even a unanimous vote, these should be defined in the partnership agreement.

Compatibility with partners’ existing wills

It is important to ensure that the partnership agreement is compatible with the partners’ individual wills. If the farm is held on a partnership title we will discuss with you whether the partnership agreement needs to address the question of common law legal rights in the partners’ estates.

Compatibility with existing title deeds

Often farms will have been bought in chunks over the years, with some parts being taken as partnership titles and some in the name of individuals. When drawing up a partnership agreement it is important to study the title deeds to understand the legal ownership of the farm so that this is correctly defined and handled in the agreement.

Conclusion

If you don’t have a partnership agreement in place, get in touch to discuss how we can help you draw up this important document; doing it now could save you time and money in the future.

If you haven’t reviewed your partnership agreement for a while, look it out and make sure it is still fit for purpose. Ideally partnership agreements, like wills, should be reviewed every 3-5 years to check whether there have be any changes to legal or tax rules that need to be thought about. Additionally, the agreement should be reviewed every time a partner leaves or a new partner joins.

If you would like us to review your partnership agreement or are thinking of assuming a new partner, give us a call and we will be happy to help.

We are a niche firm focussing on rural land and commercial work. We are based in Perth, but serve clients throughout Scotland. Agriculture and rural businesses are a vital and vibrant part of the Scottish economy, which is constantly evolving. Due to expansion, we are seeking an experienced rural property solicitor with at least 2 years PQE to join us.

The post is full time, but we are flexible and are also happy to accept applications from solicitors who are seeking a part time position.

With guidance and support, the key responsibilities for this position include advising clients about:

At the end of January the Scottish Government passed an order that brought some further provisions of the Land Reform (Scotland) Act into force.

This included the rules for the amnesty on tenants’ improvements. If you are a landlord or a tenant of an agricultural holding, these may well affect you.

If a tenant carries out any type of work that is classed as an improvement to the holding, then he may be entitled to claim compensation for that improvement at the end of the lease.

To qualify for compensation, the tenant has to be able to show that the correct notice was given under the law. The type of notice needed depends on the type of work being done. Some major works need landlord consent, others need notification three months in advance of work starting.

Many tenants will have done work without putting the right notices in place.

The amnesty rules are meant to deal with this. Under these rules, tenants have a period of time to tell their landlords about old improvements that they have done on the farm. Using this procedure, tenants can seek to have them recorded as improvements that will qualify for compensation at the end of the lease.

The amnesty period will run from 13 June 2017 for a period of three years.

During that period tenants should make a note of any work that they have done that counts as an improvement rather than just routine maintenance and repair.

These should then be submitted to the landlord, who may contest the application on certain grounds. If the application is successful, then the claimed improvements will qualify for compensation.

It is vital to note that any improvement work done after the start of the amnesty period must comply the strict rules on notices. Greater care will be needed in the future.

Tenants would be well advised to review all of the work that they have done on the holding to see if there are any valuable improvement works that were done in the past without notice. Landlords will need to consider carefully what their response should be to any notices that they might receive from tenants under the amnesty scheme.

Clients often ask us about passing the family home down a generation. This is usually driven by an idea that it could save inheritance tax or it might be to avoid the risk of avoid care cost charges.

It is really important that independent advice is taken before going down the gifting route. This is because giving away the family home (whether outright or into trust) often does not work as a strategy. It can also create other traps for the unwary.

Here are some of the reasons why we always advise our clients to think twice about transferring their house:-

If you continue living in the property after giving it away, inheritance tax may nevertheless continue to apply to the property at 40% on your death under the ‘ gift with reservation of benefit’ rules.

The only way to avoid a reservation of benefit is to pay a full market rent for living in the property. This obviously creates an immediate cash-flow problem. The rent also needs to be reviewed every few years to ensure that it keeps pace with market rates. You may need to pay a surveyor to get a certificate that the rent is in line with the going rate. Also, whoever now owns the property will be liable to income tax on that rental income.

From a capital gains tax (CGT) perspective, you will lose ‘principal private residence’ relief, which provides that no CGT is payable on a sale or other disposal of the property. When the house is sold in the future, your children may have to pay capital gains tax on the sale proceeds.

There could be another tax disadvantage for the children receiving the gift. They will be classed as already owning an interest in residential property for Land and Business Transaction Tax purposes. If they buy another property after being made the owner of your house, they will be liable for an additional tax called the Additional Dwelling Supplement.

It is sometimes thought that giving away property will take it out of the calculation of the contribution to the costs of care. However, if you give away assets and subsequently move into a nursing home, the local authority has very wide ranging legal powers to argue that the gifted property should be treated as “notional” capital. This means that you are assessed as if the house still belongs to you under the “deliberate deprivation” rules and its value is taken into accountant.

Finally, it is vital to realise that the house no longer belongs to you and you have no control over what happens to it anymore. You could find that the house has to be sold if, for example, your children die before you; get divorced or are made bankrupt. There is always the risk that you might fall out with your children in the future and you could be forced out of the home that was once yours.

So, if you, or someone you know, is thinking of gifting the family home, make sure that independent legal advice is taken before any papers are signed.